Edward H. Binns, retired MBA/CPA, organized this blog to discuss quiddity as it relates to our daily lives. Founder of the Urban Coyotes mentoring seminars, which deal explicitly with ethical survival, this blog is closed to entries but remains available for comments. NEW TO THIS BLOG? Please go to the August, 2010 postings and read the 149 postings in order! Current news posts are in the DAILY QUIDDITY blog (link on right hand margin).

Friday, September 24, 2010

A Timeline Worth Analyzing 22

The Great and Secret Show begins with a series of odd facts and trends that are assembled from letters at the Dead Letter Office of the postal service. A pattern emerges from selected facts and conjectures. Do you see a fundamental pattern emerging from these journalistic factoids over the last 38 years?

Derivatives Crisis TIMELINE

1972 Accounting standards in the U.S. are no longer generated by public accountants through the Accounting Principles Board but by the seven-member Financial Accounting Standards Board (FASB), including required members from industry, academe, and financial analysts in addition to members from public accountancy. Thus the politicization of accountant rules began in earnest.

1973 Fischer Black, Robert Merton and Myron Scholer develop a formula which sets a price on an option. This formula, adopted from a physics formula for transfer of heat in liquids, eventually wins a Nobel prize.

1973 Chicago Board Options Exchange opens

1982 James Simons starts Renaissance Technologies, commonly called “Rentec,” one of the first and most important hedge firms specializing in automated trading. Algorithmic trading or automated trading, also known as algo trading, black-box trading or robo trading includes a special class called “high frequency trading.” See: http://en.wikipedia.org/wiki/Algorithmic_trading

October 19, 1987 Stock market losses 22% of value in a single day

Late 1987 -- Plunge Protection Team formed

1988 Renaissance Technologies launches the Medallion Fund, which includes commodities futures, treasury bonds, currency swaps, and foreign bonds. Essentially swallowed Axcom Trading Advisors in 1992. This fund has become one of the very most successful speculative funds and charges high fees.

Fall 1993 Metallgesellschaft refining and Marketing US subsidiary closed after American subsidiary’s offer to oil companies of a fixed price for ten years collapses.

1994 Orange County California went broke over interest rate spread differential bets. The bankrupt county recovered $400 million of its losses from Merrill Lynch.

mid-nineties: APL computer language came out of Harvard. This is a language of compact instructions, so dense that it is difficult to edit and very difficult to proof the language for programming errors. This language and its offshoots is typically used for the “iterations” on which derivatives contracts are initially valued.

April, 1998, Commodity Futures Trading Commission (CFTC) Chair Brooksley E. Born meets with Greenspan, Rubin and Levitt and loses the fight to have all derivatives conform to CFTC requirements

May 7, 1998, CFTC issues a “concept release” about derivatives and their risk

July 5, 1998 Salomon Brothers arbitrage unit announced as disbanding

August, 1998 Russia defaults on its loans

September, 1998, Long Term Capital Management fails

Late 1999 Gramm-Leach-Bliley Act is passed, dismantling the walls separating commercial banks, investment banks and insurance companies. The act did not provide for any SEC oversight of investment bank holding companies.

2004 SEC proposes a voluntary system of market regulation. The big investment banks opted to join but the holding companies would be permitted to follow their own computer models to assess how much risk they were taking. The SEC would get access to make sure the complex capital and risk-management models were up to the job.

2006 High frequency trading accounts for 60% of trades on the London Stock Exchange. The percentage of trades attributable to high frequency traders would increase in 2007 and 2008 for both the London and New York exchanges.

It is my opinion [as of May, 2009] that the American economy will spiral into depression and will not recover until the items below in red are fixed:

-- Plunge Protection Team disbanded with SEC and FED prohibited by Federal law with criminal penalties from interfering with stock markets

--APL Computer language and its refinements are no longer in use

--Gramm-Leach-Bliley is repealed, and Glass-Steagall is reimposed

--The USA outlaws derivatives trading except for commodities traded by listed firms with reserves where the transactions occur openly on the CBOE. Separately, no federal agency or bureau is allowed to interfere with either the content or release of accounting rules, being independent, professional matters.

“It is also my opinion that Congress will not enact these corrections until a full-blown depression is manifest.”*